Mounting worries over the eurozone debt crisis and a new batch of weak economic data from the United States did a one-two punch to hammer investor confidence, shaking investors on both sides of the Atlantic.
The Dow Jones Industrial Average fell 4.3 percent, or 512.76 points -- its worst one-day drop since December 2008 -- to close at 11,383.68, erasing all of its gains so far this year.
The broader S&P 500 dropped 4.8 percent to end the day at 1,200.07, while the tech-heavy Nasdaq Composite dived 5.1 percent to 2,556.39.
London's benchmark FTSE 100 index fell 3.43 percent, retreating to levels last seen in September 2010; in Frankfurt the DAX fell 3.40 percent, and France's CAC 40 dropped 3.90 percent.
In Brazil, the Sao Paulo Stock Exchange lost 5.72 percent, while Mexico's Bolsa lost 3.4 percent.
"We're seeing the erosion and now the loss of confidence, confidence in the economy, confidence in the market, confidence in the policy makers. It's all showing up," said Hugh Johnson, of Hugh Johnson Advisors.
"There is a deep concern about global growth and of the state of play in the United States in particular," said City Index analyst Giles Watts.
"Traders are growing increasingly concerned about a sharp slowdown in US economic activity in the third quarter."
In Europe, investor sentiment remains plagued by worries that debt-laden Italy and Spain could be engulfed by the fast-moving eurozone debt crisis.
The European Central Bank announced Thursday that it would resume emergency credit-easing measures, some of which were last enacted at the height of the global financial crisis.
But the ECB's efforts still failed to restore confidence. The risk premium investors demand to buy Spanish 10-year bonds over safe-bet German debt shot back up to near a record high on Thursday.
The eurozone debt crisis has put Italy and Spain under huge pressure in recent weeks after Greece, Ireland and Portugal had to be bailed out by the European Union and the International Monetary Fund.
In the United States, data continued to point to a very weak economy, with some analysts citing fears of a new recession.
The US Labor Department reported Thursday that weekly claims for unemployment benefits remained at a high 400,000 last week.
"Stocks have retreated deeper into the red to set a new 2011 low. The bleeding continues to be broad-based," said Briefing.com.
"European banking stocks are under pressure as contagion fears work their way into Italy, the third largest economy in the eurozone."
Gold scored a new record at $1,681.72 per ounce on the spot market in New York as investors flocked to the precious metal, regarded as a safe bet in times of economic turmoil. It later retreated to $1,647.57.
Prices for US government bonds, another safe haven, also rose. The yield on the 10-year Treasury dropped to 2.46 percent from 2.60 percent late Wednesday, while that on the 30-year bond fell to 3.72 percent from 3.87 percent. (Bond prices and yields move in opposite directions.)
Oil prices in New York and London both fell more than five percent amid fears that a slowdown could take a deep bite out of global energy demand.
"The fear of a double dip recession with the slowdown in the US and the sovereign debt situation in Europe is having everybody biting their nails," said Adam Sieminski, chief energy economist of Deutsche Bank.
On forex markets, the dollar surged against other major currencies, helped by Japanese and Swiss government interventions to press their own currencies back down after the recent jump in risk-aversion.
But by the end of the day, the Swiss franc -- the favorite safe-haven of recent months -- ended higher against the greenback: at 2100 GMT, one dollar bought 0.7666 francs, compared to 0.7692 late Wednesday.
The euro fell more than two percent to 1.0818 francs from 1.1019.
But the US dollar was up against the euro, which brought $1.4106 (from $1.4318) and the yen, 78.93 yen (from 76.97).
The pound also lost ground to the greenback, to $1.6266 (from $1.6422).